2023-12-06 10:18:56 ET
Summary
- I believe that small and reasonably priced growth stocks have higher total return potential than other investments over the long term.
- I share my selection criteria for growth stocks, and use them to select five stocks that I think are strong buys now.
- These five stocks are StoneCo, SoFi Technologies, First Solar, Galaxy Digital, and Microsoft.
Thesis
Growth stocks are the backbone of my long-term investing portfolio because they have higher total return potential than less risky investments. In this article, I share my top five growth stocks to buy at the start of 2024. Although I won't try to predict how my picks (or growth stocks in general) will do in 2024, I'm quite confident that many high quality growth stocks will generate market-beating returns over a multi-decade time horizon.
Selection Criteria
My criteria for selecting growth stocks is heavily influenced by the book 100 Baggers by Christopher Mayer. This book studied stocks that have returned at least 100x since going public and found a few traits that many of them shared. In quantitative terms, the average 100 bagger started out with $170M in revenue and $500M in market cap, and took an average of 26 years to reach 100 bagger status. In qualitative terms, 100 baggers started out small and cheap, but were high quality and experienced elevated growth for a long time.
It should be noted that this study was carried out over historical data going back to 1962, and $500M in 1962 is about $5B today when adjusting for inflation. So while 100 baggers should be on the smaller end (such that they don't need to become the world's largest company to run 100x) they don't necessarily need to be micro caps.
Mapping these findings to Seeking Alpha's factor grades, this means I focus more on growth and valuation than on profitability/momentum/revisions, and I perhaps add an additional factor grade for company size (smaller is better).
Top 5 Growth Stocks For 2024
1. StoneCo ( STNE )
Seeking Alpha
StoneCo is a financial technology company that operates in Brazil. Despite a market cap of only $5B, StoneCo has an impressive array of products across payments, banking, credit, and other software (e.g. CRM/ERP). For example, they offer point-of-sale devices to allow merchants to process credit card payments in their physical stores, similar to what Square ( SQ ) and Shopify ( SHOP ) offer in developed markets.
By constantly expanding their offerings, StoneCo has grown revenue at a 51% CAGR from 2018-2023. After a strong 2023 in which their stock returned 91%, they're now valued at 5x revenue, which is still reasonable. As shown above, these considerations allow StoneCo to have great factor grades ranging from B to A+ across the board.
StoneCo is also qualitatively appealing for a few reasons. For one, Brazil is an emerging market with good demographics, reasonable inflation (leading to recent rate cuts), and a relatively stable business environment. Compared to competitors, StoneCo is unique because it has physical stores ("Hubs") throughout Brazil that it uses to promote its products (including many tuck-in acquisitions in the fragmented Brazilian software market) and provide unrivaled customer service. Lastly, it's worth noting that StoneCo is one of the few tech/emerging market stocks that famous investor Warren Buffett holds.
Ultimately, the sky is the limit for StoneCo since Brazil's economy should continue to grow, and e-commerce within Brazil should grow even faster than the overall economy. StoneCo's theoretical path to 100x long term returns would likely require Brazil to transition to a more IT-heavy economy and for StoneCo to become one of the largest companies within Brazil.
2. SoFi Technologies ( SOFI )
Seeking Alpha
SoFi is a banking stock that I've covered quite a bit over the past year in my initial bull thesis and a follow-up article . This company basically applies the inverse of StoneCo's strategy to the developed USA market by offering full service banking without physical branches. Although I believe that physical locations could be an advantage in less tech-savvy emerging markets, they also have an overhead cost.
SoFi has been able to generate huge deposit growth by using its comparatively asset-light operating model to offer best-in-class savings account rates. It then uses its growing deposit base to feed other businesses like lending, investing, credit cards, and other FinTech services. Compared to competing online banks, SoFi benefits from uniquely strong brand recognition thanks to SoFi Stadium and its industry-leading student loan refinancing business. On that note, the recent resumption in student loan repayments should continue to be a catalyst for SoFi going into 2024.
Quantitatively, SoFi has generally strong factor grades especially considering that profitability is not a focus. While SoFi's market cap of $8B means that it would need to become the largest bank in the world in order to return 100x today, factoring in inflation and economic growth over 25+ years makes that target somewhat less lofty. After all, the largest bank ( JPM ) has itself returned over 10x over the last 20 years. As such, SoFi has a path to 100x returns if it simply becomes one of the world's largest banks over the next 30 years. With a P/S ratio of just 3x, SoFi is basically valued like an established bank today despite boasting over 20% revenue growth over the last five years.
3. First Solar ( FSLR )
Seeking Alpha
FirstSolar is a pure play manufacturer of solar panels and the world leader in thin-film solar panel technology, which uses a simple manufacturing process that is optimized for hot/humid climates.
With a market cap of $16B, First Solar is already one of the largest solar stocks and a clear long term winner in the solar industry. However, it's still meaningfully smaller than leading energy companies like Exxon Mobil ( XOM ) ($400B market cap). This gives First Solar a lot of room to run despite being a bit pricey at 5x P/S, as long as renewable energy continues to become more popular.
Solar stocks have come under fire lately as rising interest rates destroyed demand for solar panels and led to global oversupply. However, over a multi-decade time horizon the picture still looks good for solar. Solar and wind have in recent years proven to be the two fastest-growing and most cost-effective forms of renewable energy. Solar is only getting cheaper over the long term, and First Solar should be one of the biggest beneficiaries of the many renewable energy subsidies the US government is handing out.
4. Galaxy Digital ( OTCPK:BRPHF )
Galaxy Digital is focused on providing crypto-related financial services to institutional investors. These include trading, lending, derivatives, asset management, mining and validator services, and custodial technologies. They also have an investment portfolio with a stake in over 200 crypto-related startups.
I generally prefer to own Bitcoin ( BTC-USD ) and Ethereum ( ETH-USD ) rather than centralized crypto companies that I view as much more prone to failure, and I've covered Bitcoin/Ethereum extensively in past articles. However, these leading cryptocurrencies are already very large, whereas the ecosystems being built around them are still in their infancy. As such, a small company like Galaxy with less than 1% of Bitcoin's market cap has more potential to return 100x compared to Bitcoin itself (and more potential to fail).
As a small Canadian-listed stock (based in New York), Galaxy Digital is the only one of my picks that isn't covered by Seeking Alpha's factor grades. However, with a $2.4 billion market cap, $4.5 billion in assets under management (+124% y/y), and a 157% return year-to-date, it's likely that Galaxy Digital would score quite well in factor grades for growth and (to a lesser extent) valuation.
Qualitatively, Galaxy has the potential to outperform as one of the only publicly-traded pure play cryptocurrency stocks which isn't focused on mining. Bitcoin will experience a halving event in 2024, which has historically been very bullish for the overall crypto industry. In the last halving year (2020), Galaxy stock went up 10x in a single year. It will be hard to repeat that from a larger starting market cap in 2024, but the halving will certainly be a tailwind.
5. Microsoft ( MSFT )
Seeking Alpha
Microsoft is a stock that needs no introduction, as its vast array of products including Windows, Office, Azure, Xbox, and LinkedIn make this company almost as diversified as some ETFs. Even as the latest tech buzzword has shifted from cloud to AI in 2023, Microsoft has remained at the forefront of both topics. While I'm not necessarily going all in on the AI bandwagon at this point, I'm confident that Microsoft will remain relevant regardless of how the tech world evolves in the coming years.
That said, Microsoft is actually the antithesis of a 100 bagger since it's a richly valued stock with a larger market cap than any other company besides Apple. In fact, Microsoft's worst two factor grades are valuation and growth - the exact two that I said I would prioritize in my selection criteria. If Microsoft grew 100x, then the market and economy as a whole would have to grow to astronomical levels alongside it. That's probably going to take longer than 26 years unless inflation gets out of control.
I still wanted to include Microsoft in this list because it's proof that investing for 100 baggers isn't the only way to generate strong returns from growth stocks (and because Microsoft is a very high quality company that's worth featuring whenever possible). Instead of only buying potential 100 baggers, it's worth diversifying into some blue chips as well - even on a short list like this!
Finhacker
Microsoft was already richly valued and the world's largest company by a wide margin in the year 2000, which is almost 26 years ago now. But investors aren't complaining about Microsoft's +10x return since then - especially compared to the S&P 500's ~2.5x return. It goes to show that strong returns can come from high quality companies that grow at a medium rate and buy back their stock over long time periods, even if they're already perceived as being out of room to run.
Conclusion
This list ended up heavily featuring fintech companies. I intended to make the list more diversified at first, but fintech stocks currently have some of the best Seeking Alpha factor grades among growth stocks. For example, CRISPR ( CRSP ) was a stock I was interested in featuring after their blockbuster drug won regulatory approval in the UK, but I cut it because it scores C for both valuation and growth.
Although I try to time my buys well, after buying a stock my strategy is to write that money off as lost, then check back in a few decades. This means that I'll hold some stocks until bankruptcy, perhaps even including some of the stocks I highlighted here. But considering that the average 100 bagger took 26 years to deliver, this mindset avoids common mistakes like averaging down too much or selling too early. After all, hitting on one 100 bagger can offset many losers. At a time of year when everyone is focused on what stocks will do well in 2024, it's important for growth investors to keep a long term mindset.
For further details see:
5 Growth Stocks For 2024